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Tired of paying through the nose for health insurance you never use? As dumb as it may seem to throw good money after bad, going entirely without health insurance is a risky move, potentially leaving you one serious accident away from bankruptcy. But one insurance option that's growing in popularity is worth a closer look, especially if you have some money in the bank and don't tend to have a lot of medical expenses.
Time for some alphabet soup
First, get ready for a bunch of confusing acronyms. Health savings accounts, or HSAs, are tax-favored vehicles that let you set aside money for medical expenses. The easiest thing to do is to think of HSAs as IRAs for health care, because they're similar in several ways.
But before you can open an HSA, you need to have what's known as a high-deductible health plan or HDHP. HDHPs and HSAs always go together, but they're different things that you typically have to establish separately.
As their name suggests, HDHPs allow you to have a higher deductible on your health insurance than most traditional plans offer. If you've ever bought auto or homeowners insurance, you've probably noticed that if you choose a higher deductible on your policy, you can cut your premiums significantly.
The same principle applies to HDHPs. Instead of providing coverage for all your medical expenses, HDHP insurance only kicks in after you pay a fairly large deductible: $1,200 for single coverage and $2,400 for family coverage. After you pay that much, HDHPs work like regular health insurance policies. Many employers offer HDHPs in their benefits packages, and Aetna (NYSE: AET ) , UnitedHealth Group (NYSE: UNH ) , and Humana (NYSE: HUM ) are among the insurance companies that offer them to customers.
If you have an HDHP, you can open an HSA. Some insurance companies offer HSAs and HDHPs in one package, but you don't have to combine them. Instead, you can go directly to financial institutions to open HSAs, including US Bancorp (NYSE: USB ) , Bank of America (NYSE: BAC ) , and Wells Fargo (NYSE: WFC ) .
Using your HSA
Once you have an HSA, you need to make contributions to it. In 2010, singles can contribute up to $3,050, while families can put $6,150 into an HSA. Contributions bring two benefits: You get a tax deduction for the amount you put into the HSA, and as long as you use the money for qualifying medical expenses, you can take it out tax-free and avoid tax on any income your HSA earns.
Once you have an HSA, using it is easy. Many HSAs offer checks or debit cards that let you immediately pay for medical expenses directly from your account. Alternatively, you can just pay your doctor out of pocket and reimburse yourself from your HSA at a later date.
That way of doing things may sound familiar if you've ever used a flexible spending account at work. The advantage of HSAs, though, is that unlike flex plans, you don't have to spend your HSA money by the end of the year. Any unused money carries over to future years.
Endangered no more
Before the health-care reform law passed, some believed that HSAs would fade into the sunset. But although the law reduced the amount that workers could set aside in flex plans, it didn't change the HSA provisions.
As with any choice of benefits, HSAs come with an inherent trade-off: You pay less in premiums in the hope that you won't incur major medical expenses. If you actually end up having to pay that high deductible amount, you could come out worse off even after taking lower monthly premiums and the tax savings from HSA contributions into account.
Another shortfall of HSAs is that like 401(k) plans, you can't simply invest in whatever you want. Each institution's HSA comes with fixed investment options, and although you can find mutual funds and other choices linked to stocks, they often come with hefty fees. However, some employers actually add contributions to an employee's HSA, making the plan an even better option.
Keeping open the HSA/HDHP combo as a possibility can make a lot of sense, especially if you're healthy and have the money to make contributions. With lower premium costs, the tax benefits are simply icing on the cake.
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Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.